Piepkorn Manufacturing Working Capital Management

After completing the short-term financial plan for next year (at the end of Chapter 16), Gary Piepkorn approaches you and asks about the company’s credit policy, In looking at the competition, most companies in the industry offer credit to customers, so Piepkorn Manufacturing appears to be one of the few companies that doesn’t. Numerous customers have expressed the probability of altering to a different supplier due to the scarcity of credit. Gary is interested in knowing how implementing a credit policy will influence the short-term financial plan for next year. In addition, he would like you to inquire as to the probability of getting enhanced credit terms for the company’s purchases.

To analyze the probable switch to the new credit terms, Gary has asked you to investigate industry standard credit terms and rework the short-term financial plan supposing Piepkorn Manufacturing offers credit to its customers. He would also like to investigate how better credit terms from the company’s suppliers would influence the short-term financial plan.

problems

problem1. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 45. The discount will start on to be offered on the first day of the year. You desire to examine how this credit policy would influence the cash budget and short-term financial plan. When this credit policy is implemented, you think that 60 percent of customers will take advantage of credit offer and the accounts receivable period will be 24 days. Rework the cash budget and short-term financial plan under the new credit policy and a target cash balance of $80,000. What interest rate are you effectively providing customers?

problem2. You have talked to the company’s suppliers regarding the credit terms Piepkorn receives. Currently, the company obtains terms of net 45. Your suppliers have stated that they would offer new credit terms of 2/25, net 40. The discount would begin to be offered on first day of the year. What interest rate are the suppliers offering the company? Rework your cash budget and short-term financial plan from the previous problem supposing you take advantage of the discount offered.